The article “Why Singling Out Business Owners Is Good Politics, But Bad Tax Policy” was originally published on Financial Post on October 11, 2017.
Jason Heath: The proposed tax changes miss the mark if the Liberals truly want wealthy Canadians to pay more
Let me start by confessing that I am a business owner and like most Canadians, I aim to minimize my taxes. The Liberal government’s proposed corporate tax changes, if enacted, will increase my taxes payable. In that regard, I have a selfish bias against the Liberal proposals.
That said, this commentary is coming from a bipartisan source. I have in the past been publicly and privately supportive and critical of different political parties. I think they all have good and bad ideas from time to time.
One thing I can give the federal government credit for is that a tax hike on business owners is a brilliant idea from a political perspective. According to a poll by jobs site Workopolis, 37 per cent of Canadians quit their jobs because of their boss. A Chatelaine survey found that 54 per cent of women fantasize about quitting their job at least once every month. Canadians do not like their bosses and do not like their jobs. This makes business owners a perfect target.
The nature of business is also such that there are more workers than business owners. So, if you are going to raise taxes, why not tax the villains, particularly when they represent the minority? The majority of Canadians are not affected and majorities help win elections.
The problem is that there are lots of tax benefits available to high-income employees who are not business owners that are not available to the middle class. And not all business owners are high-income earners — few are, in fact. I think that by singling out business owners rather than focusing on high-income earners in general, regardless of whether they are business owners or not, the proposed tax changes miss the mark if the Liberals truly want wealthy Canadians to pay more.
I find that the proposals seem to insinuate that “rich” people can incorporate so that they can then “evade” tax. Some of the propaganda appears to read this way. To be clear, if a business owner is successful, there are long-standing corporate tax rules that allow tax reduction and deferral for business income earned in, saved in or paid out from a corporation. Bank CEOs do not set up corporations to take advantage of Canada’s purported corporate tax “loopholes” — they have other loopholes to leverage.
So, when we are talking about the corporate tax strategies currently being debated, they are generally only available because someone has built and run a successful business. This is important to understand: Corporate tax strategies are used by successful business owners, including those who are squarely in the middle class, not broadly by wealthy Canadians who are not business owners.
Employees can defer tax by contributing to an RRSP. They can avoid tax by contributing to a TFSA. Tax incentives are available to everyone to incentivize behaviours like saving for the future, taking business risks and so on. Most middle-class people have a tough time maxing out their RRSPs and TFSAs, so even simple tax tools like these disproportionately benefit the wealthy.
If you want high-income earners to pay more tax by reducing their tax incentives, why not eliminate the 50 per cent tax-free portion of employee stock options? Maybe the special tax treatment should only be available to smaller start-up companies, not publicly-traded companies who issue them to high-income executives?
What about supplemental executive retirement plans that allow senior executives and politicians to earn large tax-deferred pensions exceeding registered pension plan limits? Why do bank CEOs and prime ministers get tax advantages over business owners, as well as middle class bank employees and civil servants?
What about family trusts? Wealthy employees can gift or loan their savings to a trust and have the income taxed to their minor children or grandchildren, who often have little to no tax payable. Business owners can only split income with their adult children or grandchildren by paying them dividends once they are 18 years old, but some high-income employees can engage in income splitting with toddlers.
Wealthy people, whether business owners or employees, can buy and sell a principal residence with an unlimited tax-free capital gain. Is this not a tax loophole for the rich that should be limited in some way, with a maximum capital gains exemption on a principal residence as they have in the United States?
All that said, corporate tax strategies, employee stock options, family trusts and principal residence exemptions are not tax loopholes. They are tax incentives that are available within the confines of the law. If we are pursuing tax loopholes, should we not focus on the cash and underground economy instead? These loopholes constitute outright tax evasion when your home renovation or car repair costs less if you pay cash and income and sales tax are not paid to the government.
The problem with changes to taxation of employees, real estate or the underground economy is closing these “loopholes” would impact a lot more Canadians than the smaller group of evil business owners currently targeted. These would not be popular tax increases.
Another problem with the proposed corporate tax changes is some business owners are going to pay significant additional income tax immediately, every year going forward, with little notice. A sudden tax increase for any group of taxpayers seems unfair when it is this dramatic, especially when their purported tax loopholes really are not loopholes at all and they have been following Canadian income tax law all along.
To put it in perspective for civil servants, it would be like the federal government saying, “your pensions are too generous, you are ripping off people who are not civil servants and you will no longer accrue future pension benefits starting January 1, 2018.” Can you imagine?
And in defence of the unions who are being criticized for not supporting business owners in this tax fight, I doubt business owners would be lining up on the picket lines with union members if it were the other way around. Everyone is at least a little biased and self-serving at the end of the day.
If the Liberals want to crack down on tax loopholes or increase tax for high-income earners, that is one thing. But it should be balanced rather than focusing on a group of taxpayers who are easy to pick on and for other Canadians to vilify.
And if you do want to raise corporate tax revenues, why not just keep it simple and reduce the small business deduction, which is the threshold for the low rate of tax for business owners who save money in a corporation? This limit is $500,000 per year. That is a high limit.
Or do what Quebec has done at the provincial tax level, where the small business deduction is limited to those who employ more than three full-time employees or for corporations in the primary or manufacturing sectors?
The proposals are unnecessarily confusing if the intention is to just to make business owners pay more tax.
All that said, I think that politically, this is a brilliant strategy by the Liberals. For my own selfish sake, I hope the changes implemented are nowhere near as extensive as the proposals. And for the sake of the economy and my children’s future, I hope reason prevails so we can continue to incentivize innovation, risk-taking and job creation, while balancing fair taxes — whatever fair is.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.